'Insider' difficult to define in market leak cases

Senate committees, SEC have opened probes into leaks

A U.S. senator’s review of a possible leak of market-moving government information to an investor services firm has stalled over a gray area of law and regulation that may help his push for new legislation.

In the absence of clear rules about what’s legal, Senator Charles Grassley, an Iowa Republican, said his search to find a culprit for the alleged leak, which boosted shares of health insurers, has shown the hurdles that stand in the way of determining who is getting potential insider information from the government and how it’s being used.

Height Analytics LLC told clients on April 1 that Medicare was planning to reverse a rate cut for health plans offered by insurers led by Humana Inc. Minutes after the firm’s note came out at 3:40 p.m. New York time, insurer stocks surged. About an hour later, the government announced it was reversing the proposed payment cut for Medicare Advantage health plans as Height said it would.

Grassley, a member of the committee that oversees Medicare, and Medicare have opened probes into the matter. A preliminary investigation has also been opened by the Securities and Exchange Commission, a person familiar with that inquiry said.

“I don’t believe that the political intelligence and policy research industry has done a very good job of policing itself,” Mike Mayhew, chairman of New York-based Integrity Research Associates, said in a telephone area. “Part of that is that it’s a gray area, so they don’t know how to police themselves.”

Grassley Connection

Before Height’s analyst released his note on April 1, the firm received advice bolstering its prediction from a former aide to Grassley, according to company e-mails provided to Bloomberg. The former aide, Mark Hayes, now a lobbyist with Greenberg Traurig LLP in Washington, told Height analyst Justin Simon that “very credible sources” had said the government would reduce the Medicare Advantage payment cut.

Grassley’s investigation is now turning away from Washington-based Height, said Jill Gerber, a spokeswoman.

“There has been no indication that Height Securities communicated with any government official who had advance notice of the CMS decision,” Gerber said, referring to the Centers for Medicare and Medicaid Services, which runs the government health programs. “The investigation is continuing. Senator Grassley has requested additional information about the relationship between Height and Greenberg Traurig and looks forward to full cooperation from both firms as well as CMS.”

Height has maintained it did nothing wrong. “Our report was based on careful and close analysis of the facts, and was solid, sound research in accordance with applicable laws and regulations,” Andrew Parmentier, Height’s managing partner, said in a statement today to the firm’s clients. “Our analyst made an independent call based on multiple data points and he was correct on the big issue.”

The discussions in advance of the Medicare decision illustrate the connections among those on Capitol Hill, the administration and lobbying groups that can sometimes be exploited for profit. Grassley has pushed for a law that would require those who seek profitable tidbits of information to register with the government.

“This situation emphasizes the value of shedding light on the political intelligence industry with public disclosure requirements,” Grassley said today in an e-mail.

The exchanges between Simon and Hayes were disclosed previously by the Wall Street Journal.

Memo’s Timing

Height’s investor memo went out at 3:40 p.m. on April 1, about 45 minutes before Medicare’s official announcement. “Thirty minutes earlier, at 3:12, p.m. Eastern Time, on Monday, April 1, 2013, I understand a lobbyist at Greenberg Traurig sent an e-mail to Height Securities and others regarding the CMS announcement on the Medicare Advantage policy rate change,” Grassley wrote in a letter to Greenberg Traurig seeking information about the incident.

Hayes wrote Simon at 3:12 p.m., after Simon had written Hayes three minutes earlier with his speculation about the decision. Hayes’s company has occasionally done legal work for Height, a person familiar with the relationship said, although Hayes wasn’t paid for his advice on the Medicare Advantage issue. The person requested anonymity because he wasn’t authorized to publicly discuss the matter.

Doctors’ Pay

Hayes told Simon that he expected the payment cut to be reduced after Medicare officials changed their calculations, including an assumption that Congress would act to reverse a 25 percent cut in physician’s fees scheduled for next year. Congress has acted every year for a decade to reverse the annual cut, dictated by a formula called the Sustainable Growth Rate.

“We have heard from very credible sources that the final notice will adjust the phase-in on risk adjustment and take into account the likelihood/certainty of an SGR fix,” Hayes wrote in an e-mail.

A spokeswoman for Hayes’s firm, Jill Perry, said Hayes didn’t receive or share any “non-public” information with Simon.

“Mr. Hayes provided his own policy analysis of this situation,” she said in an e-mail. Hayes didn’t return a phone message or e-mail seeking comment on his actions.

Shares Climb

Simon’s note sent shares of Humana and other health insurers up as much as 9.5 percent before the close of trading in New York. Simon had written an earlier note on March 26 assigning a low probability that Medicare would reverse its proposed cut in payments, and had been working on April 1 to revise his prediction after reviewing subsequent notes from other analysts that said a positive decision for the insurers was likely, said the person familiar with the relationship between Greenberg and Height.

Simon didn’t contact any officials at the White House, the Medicare agency or the Health and Human Services Department while working on his note, the person said. He corresponded with a second lobbyist who also speculated that the Advantage decision would be changed in insurers’ favor.

A spokesman for the Medicare agency, Brian Cook, said in an e-mail that he couldn’t comment on whether any agency staff had communicated with Hayes because the Health and Human Services inspector general is investigating whether the Advantage decision was leaked ahead of the official announcement.